Prior Settlement Agreement Helps the Jury find Liability and Damages

The Nebraska jury found Sprint liable for infringing Prism’s patents and awarded $30 million in reasonable-royalty damages. U.S. Patent Nos. 8,127,345 and 8,387,155. [verdict]

AT&T was also sued under the patents but ended up settling the case for [REDACTED LARGE SUM OF MONEY]. On appeal, Sprint argued (unsuccessfully) that the settlement should not have been shown to the jury under Federal Rule of Evidence 403.

FRE 403 permits exclusion of “relevant evidence” when its “probative value is substantially outweighed by a danger of one … unfair prejudice, confusing the issues, misleading the jury, undue delay, wasting time, or needlessly presenting cumulative evidence.”

Prior settlement agreements are obviously probative since they help to establish value of the patented technology in the industry. Traditionally, the settlement value is modeled as less than the value of the patent once its validity and infringement are established. However, the mixture of risk aversion and litigation costs lead to some settlements that appear greater than the expected value of patent rights.

Here, the Federal Circuit found found “adequate basis for admitting the AT&T Settlement Agreement.” The agreement covered the same patents and – at trial – Prism’s expert explained differences between usage of AT&T and Sprint to help the jury use the prior agreement as comparable.

That Agreement covered the patents at issue here, though not only the patents at issue here. In that common situation, evidence was needed that reasonably addressed what bearing the amounts in that Agreement had on the value of the particular patents at issue here.

For me, the larger potential issue is that the jury is more likely to find the patent valid and infringed if it know that AT&T already paid a [REDACTED LARGE SUM OF MONEY] to settle the case. This would suggest at least a bifurcated trial. However, Sprint did not appear to make that argument on appeal.

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A very interesting argument raised by Sprint on appeal was based upon Rude v. Wescott, 130 U.S. 152 (1889). In particular, Sprint argued that prior licenses can be used to prove an “established royalty” but not to prove a “reasonable royalty.” Of course, a single license would not be sufficient to prove the established royalty. See also Cornely v. Marckwald, 131 U.S. 159 (1889).

The Court held in Rude that there was insufficient evidence to prove what has been called an “established royalty” as a measure of damages at law for patent infringement—i.e., “such a number of sales by a patentee of licenses to make, use and sell his patents, as to establish a regular price for a license.” On appeal, the Federal Circuit rejected the argument as too-old: “The Court in Rude used both the language of patent damages law and the language of evidence law, and both have changed significantly since Rude.” In addition, the court likely cut-short certiorari on the issue by finding that Sprint had failed to properly preserve the arguments for appeal.

Dennis, great analysis except for the sentence “Of course, a single license would not be sufficient to prove the established royalty,” citing Cornely v. Marckwald, 131 U.S. 159 (1889). That sentence is true regarding established royalty based on the patentee’s licenses with third-parties, but it is not generally true, and is certainly not true with regard to a license with the accused infringer or, in some circumstances, its privies. The patentee and accused infringer may have previously entered into an agreement by which they set the price for a license, but one or both of the parties did not perform under the agreement. In that circumstance, the royalty required by the agreement–a single agreement–ordinarily will be treated as an established royalty. See Seymour v. McCormick, 57 U.S. 480, 490-91 (1854) (reversing damages award for more than the established royalty set by defendants’ licenses). Accord Middleton v. Wiley, 195 F.2d 844, 846 (8th Cir. 1952) (reversing denial of established royalty damages); Seal-Flex, Inc. v. W.R. Dougherty & Assocs., 254 F. Supp. 2d 647, 655 (E.D. Mich. 2003) (“In light of the existence of an established royalty, the Court need not engage in the process of determining a hypothetical royalty.”).

I was checking out this case, partly wondering whether patent eligibility under 101 was an issue. (It wasn’t mentioned in the CAFC opinion, so far as I can see.)

I did discover that there was a parallel, later, case in the (8:12-cv-00124) in the U.S. District Court for the District of Nebraska, where Prism Technologies asserted the same patents (8,127,345 and 8,387,155) against T-Mobile.

However, in that case, the jury found that T-mobile did not infringe the patents. It seems that Prism’s appeal at the CAFC is 16-2031 and the cross-appeal is 16-2049. I haven’t been able to find out more through web search.

Apparently Prism are appealing primarily on the grounds that the jury was allegedly misled by the fact that a lawyer for T-Mobile had pointed out that the word “cellular” did not appear once in the patent. (Surely that would be relevant for whether T-Mobile would believe that they infringed the patent, for damages, irrespective of whether the claim construction covered cellular networks or not?)

The claim, so far as I can tell, is directed towards authenticating a request for data at an “access server”, where the “access server” communicates “identity data” to an “authentication server” which checks the identity data with respect to a database. Claim one of the ‘345 patent seems to cover any normal way of granting access on the basis of “identity data” on a device connected to the internet, provided that that an “authentication server” receives “identity data” from an “access server” and checks the “identity data” against data stored in a database. That, at any rate, seems to be the gist of the claim. T-mobile were apparently able to prove, to the satisfaction of the jury, that they did not have “authentication servers” distinct from “access servers”.

The “abstract idea” proposed by the defendant at stage one of the Mayo test was “providing restricted access to resources”. The district judge agreed that this was an abstract idea, citing another case, and thus Step One of the “Mayo test” went to the defendant. But the judge claimed that there was an inventive concept at Step Two, According to the district judge, “the claims modify the way the internet functions to provide secure access to a protected resource. The problems addressed by Prism’s claims are ones that “arose uniquely in the context of the Internet, and the solution proposed was a specific method of solving that problem”. Of course the quote came from DDR Holdings. The only reference to the “Internet” is in the preamble: “A method of controlling access … to protected resources via an Internet Protocol network”. One would surely presume that all the to-and-fro between the “access server” and the “authentication server” would take place over a local network. The specification makes fleeting reference to TCP/IP, UDP/IP and HTTP, but includes loads of e-commerce details. Which is perhaps hardly surprises, as the ‘345 patent claims priority from and seems to share a specification with US patent 6,516,416, whose independent claims are far more elaborate and specific.

I cannot help thinking that the district judge has not fallen over himself to explain to the CAFC reviewing court how he found the “inventive concept” in the alleged changes to “the way the Internet functions”. After all the specification provides no details of any modification to standard TCP/IP protocols. Indeed technical detail is not exactly evident on the face of the claims, despite all the detail about how the various “servers” are communicating to one another, apparently in standard English.

It would be interesting to see how CAFC handles this one. Rule 36 affirmance?

According to the district judge, “the claims modify the way the internet functions to provide secure access to a protected resource.

LOL

Sure they do. And I just modified it again. Wowee zowee. The Internet never displayed this text in this order until now. Also: I authorize everyone currently viewing this page to copy and paste this text freely, without attribution. Oh lookie: I just modified the Internet again.

Go ahead and talk about the so-called “printed matter doctrine” and it’s relevance to this case if it’s so important to you. Lay it all out for everyone and don’t forget to rant and froth about judicial activism along the way. After all, you’re so sensible and consistent. Totally not a hypocrite! And the so-called “printed matter doctrine” is a real model of deep thinking and thoughtfulness. Sure it is!

According to the district judge, “the claims modify the way the internet functions

Of course, “the claims” don’t modify anything except the page or the display they’re printed on or displayed on. But they are extremely important! Without them, you don’t have a valid or enforceable patent. That’s the functional relationship between claims and the rest of the patent. Enjoy the nuance.

The comment to which this reply belongs was posted in part because the Prism v. T-mobile case concerns the same patents and plaintiff as the case in the posting.

But also there was some discussion in comments to an older posting where Ned Heller challenged me to try to explain why the claims in Bilski were abstract. Having thought more about the matter, I was also looking for a pretext to revive the discussion. We have claims here in the patents at suit where eligibility was challenged on 101 grounds in the Prism v. T-mobile case.

I will first try to put into words some thoughts regarding the construction of 101, to seek to identify the underlying standard (as distinct from the specific Mayo/Alice ‘test’) that SCOTUS, as I interpret their opinions, would seek to enforce. This is premised on the following: “Congress” did not intend “everything under the sun” to be patent-eligible subject matter, subject only to either operating entirely in the human mind or without human involvement, and in any case Congress has revisited 102 and 103 in the AIA, and the report of the House Judiciary Committee is far more detailed and forthcoming concerning the “legislative intent”; the first of the “Three Doors” has a stronger lock on it, and is not the wide open barn door described by Giles Rich; the term “invention” under Title 35 does not equate to “what is claimed”; the Alappat doctrine that installing a program on a computer creates a new machine is not good law according to SCOTUS, and moreover contradicts Benson. Of particular relevance here is that the Benson court held not only claim 13 but also claim 8 (drawn to a process on a “reentrant shift register”) to be ineligible subject matter under 101. Moreover the Old Piano Roll Blues were very thoroughly rehearsed in the oral argument for Benson. Also the precise wording of 101 needs to be taken into account in constructing the statute; I take this to be affirmed by CAFC in In re Nuijten. Next “judicial exceptions”. SCOTUS opinions mention both “laws of nature” and “natural phenomena”, so an argument seeking to distinguish “laws” from other “phenomena” is unlikely to carry much conviction. Also the category of “abstract ideas” is somewhat amorphous, including in particular “abstract intellectual concepts”, such as those of mathematics and human culture, and “semiotic” abstractions signified by flavours of “data” in physical form, in addition to untethered over-broad abstractions in the sense of Morse.

So, in order to be eligible to be considered under the remaining provisions of Title 35, a claimed “invention” must either be a “new and useful” machine,…, (statutory) process, or must be an “new and useful improvement” to an existing machine,…,process. Thus, in order to meet the standards of 101 one must ask, for “new machines”, what in the claims purports to be “new and useful”. Alternatively, if the claim is drawn to an improvement, what is the nature of the improvement. So in order to analyse a claim under 101, one needs to identify the “new and useful” product or process, or the nature of the “improvement”. If this is not “directed to” a “judicial exception” then the claim passes 101. But, in order to determine what could support an assertion that the subject matter is indeed “new and useful”, one must determine what distinguishes the claimed invention from the (usually acknowledged) state of the art. The significant consideration in relation to the alleged overlap of 101 and 102/103, is that, although the investigations may overlap, the purposes are different. In a 101 enquiry, the question to be answered before undertaking the analysis are the following: “What is the nature of the claimed improvement to the prior art? Is this improvement useful? Is it “directed to” a judicial exception?”. If the claim is directed to a judicial exception, one then examines first the subject matter of the rest of the claim to see whether it merely recites “conventional and routine” matter well-known or acknowledged in the specification to lie within the state of the art. If nothing of this sort is found, then one analyses how the “abstract ideas” or “natural phenomena” interact with the remaining claim elements. If, for example, the improvement results in a genuinely new product or process (in physical terms, independent of any preceding, concurrent or subsequent data processing of the sort that occurs in the human mind), then the likelihood would be (on my impression as to nature of the SCOTUS standard) that the claim is patent-eligible.

Thus I would suggest that, for example, the subject matter of CellzDirect should (and indeed did at CAFC) pass the 101 eligibility test with flying colours.

Also improvement to digital image processing within a digital camera that results in better quality images should be patent-eligible, if appropriately claimed, irrespective of whether the improvement comes from hard-wired electrical circuits or from “software”, and irrespective of the fact that the final product is a digital image in JPEG format (or equivalent under patent law principles). An analogous case is In Re Abele.

(I have just noticed, in writing this comment, that Abele is cited, in positive terms, in the SCOTUS Mayo opinion. Thus this provides some support for supposing that SCOTUS would also find the improvement to the digital camera patent-eligible.)

Backtrack re last paragraph. I was looking at the wrong Mayo opinion. Abele is mentioned in Rader’s CAFC opinion, not Breyer’s SCOTUS opinion. Nevertheless a genuine improvement to a digital camera, claimed end-to-end, but implemented in software should be patent-eligible under Diehr, and also I suggest under the Mayo/Alice “test”.

Your perspective is off – and severly so in this quick series of yours:

“the first of the “Three Doors” has a stronger lock on it, and is not the wide open barn door described by Giles Rich; the term “invention” under Title 35 does not equate to “what is claimed”; the Alappat doctrine that installing a program on a computer creates a new machine is not good law according to SCOTUS“

Interesting issue. Here is what the oft-cited Georgia-Pacific v United States Plywood Corp. 318 F. Supp. 1116, at 1120 (S.D. NY, 1970) has to say on this subject, as factor number 1:
“1. The royalties received by the patentee for the licensing of the patent in suit, proving or tending to prove an established royalty.”

Paul, please note that established royalty is a form of actual damages and is not a form of reasonable royalty or a factor in the reasonable royalty analysis, as some would suggest. While the G-P district court cited evidence tending to prove an established royalty as a factor in the reasonable royalty analysis, 318 F. Supp. at 1120, the court’s analysis shows that such evidence is a gating factor in that if an established royalty had been proven that would have ended the reasonable royalty inquiry: “The parties agree that there was no ‘established’ royalty for USP’s Weldtex or GP striated. Consequently, it is necessary to resort to a broad spectrum of other evidentiary facts probative of a ‘reasonable’ royalty.” 318 F. Supp. at 1121. That is so because established royalty is a different, and better, form of damages analysis. Clark v. Wooster, 119 U.S. 322, 326 (1886) (“It is a general rule in patent causes that established license fees are the best measure of damages that can be used.”); see also Burdell v. Denig, 92 U.S. 716, 719 (1876); Birdsall v. Coolidge, 93 U.S. 64, 70 (1876). Some Federal Circuit opinions have fumbled this analysis, suggesting that established royalty is a form of reasonable royalty. See Nickson Indus., Inc. v. Rol Mfg. Co., 847 F.2d 795, 798 (Fed. Cir. 1988) (“Where an established royalty exists, it will usually be the best measure of what is a ‘reasonable’ royalty.”). Others, however, have appreciated the distinction and relationship. See Integra Life Sciences I, Ltd. v. Merck KgaA, 331 F.3d 860, 869 (Fed. Cir. 2003) (“[A]n injured patentee enjoys at least a reasonable royalty even when unable to show lost profits or an established royalty rate.”); Riles v. Shell Exploration & Prod. Co., 298 F.3d 1302, 1311 (Fed. Cir. 2002) (“The statute guarantees patentees a reasonable royalty even when they are unable to prove entitlement to lost profits or an established royalty rate.”). The Supreme Court distinguished established royalty from a reasonable royalty in General Motors Corp. v. Devex Corp., 461 U.S. 648, 651-52 n.5 (1983), and Dowagiac Mfg., Co. v. Minnesota Moline Plow Co., 235 U.S. 641, 648 (1915).

I found this position of the cross-appeal also interesting in that the court held that the damages award covered both past and future infringement, thus finding no basis for awarding ongoing royalties. The court distinguished prior cases where the damages proved were for past infringement only.